Economic Survey doesn’t admit to cash crunch post demonetisation

The latest Economic Survey starts with a robust picture of the Indian economy by questioning credit rating agencies and the criticism against poor social sector spending. It also compares the Indian economy with China in terms of export growth and biased credit rating.

The survey explains that India’s GDP growth rate is 8 per cent compared to China’s 5 per cent, while the global economy grew at 3 per cent. In terms of export growth, the Indian export sector is growing at 15 per cent, Chine at 7 per cent and global export at 3 per cent. 

Comparing  the Indian economy with China is the need of the hour, especially in the context of the border dispute. The government has the right to make such a comparison to justify India’s economic performance and get public confidence.

The fact is that the latest was a much awaited Economic Survey, being the first after demonetisation. The government paid special attention to explain demonetisation in the survey, in fact its very purpose seemed to be to clarify the logic behind the noteban effort.

It accepts the fact that GDP rate has fallen and the reasons which are mentioned include decline in fixed investments by the corporate sector - i.e. declining private capital sector investment. On the consumption side, the government expects a great jump due to the 7th Pay Commission salary recommendations. It seems that the government is putting the onus on government-led consumption of the salaried class to achieve higher growth rates.

This is a theoretical debate and not necessarily true for an economy like India, where 93 per cent of the economic activity happens in the informal sector.

If economic growth depends on the salaried class and private corporate sector capital formation, it has to exclude many commodities which have less market value but are essential for the people. The government has to make a target-oriented growth model which promotes only the consumer market and high value-added production. This is not easy to do. The huge gap between Indian society and market is still a challenge.

The survey is confident of starting a declining trend of consumer price index inflation. It was reported as 4.9 per cent during April-December 2016, as per the survey, and reached 3.4 per cent at the end of December 2016.

The wholesale price index was also shown lower at 3.4 per cent at the end of December 2016. Such robust figures never tell the true nature of inflation in India.

The huge informal market, decentralised production process and subsidies determine the inflation of the essential commodity market in the country. In India, essential commodity price is basically determined by supply factor. Not this economic survey, no other economic survey, nor any government policy documents discuss this core issue.

Also, the inflation index is highly decentralised in the country; the national average seldom represents the reality. There is a price rise in the essential commodity market and that is the hard reality the Indian society is reeling under.

As said before, demonetisaton occupies a prominent position in the survey. Perhaps for the first time, the government has theorised demonetisation, and the survey argues that the exercise affects the economy through three different channels.

It is potentially a) an aggregate demand shock because it reduces the supply of money and affects private wealth, especially of those holding unaccounted money; b) an aggregate supply shock to the extent that economic activity relies on cash as an input (for example, agricultural production might be affected since sowing requires the use of labour traditionally paid in cash); and c) an uncertainty shock because economic agents face imponderables related to the magnitude and duration of the cash shortage and the policy responses (perhaps causing consumers to defer or reduce discretionary consumption and firms to scale back investments). 

A further explanation behind demonetisation is the same rhetoric of hunting out black money, going for a digital economy and transferring all savings to the formal banking system. The survey compares “Less Affluent” and “Affluent” consumers’ digital payments and justifies that the digital transaction effort is a success.

The trend has been fluctuating three months after demonetisation. The survey report does not accept the fact that there was a severe cash crunch which had hit market transactions. It claims that between 25 to 35 per cent reduction in cash transactions took place, and did not cause large-scale loss.

The core argument of the survey is that demonetisation did not affect the cashless part of the economy. Interestingly, the survey puts forward the common perception that “(in) the cash-intensive economy, liquidity shortage has led at least transiently to greater recourse to informal credit (such as kirana shops allowing regular customers to pay at a later date)”.

GDP assessment was done on the basis of the assumption that transactions took place with cash and non-cash, and hence there was no lowering of GDP growth rate. The Economic Survey puts faith in digitalisation as the long-term imact of demonetisation.

Another major observation of the survey is corporate stressed asset management. The survey indicates policy level change in stressed asset management in the context of expanding private sector capital assets. So it proposes a strategy of public asset rehabilitation to deal with stressed assets.

Eventually, it leads to considering these assets as equity and raises capital from the market or from banks. One should read this suggestion along with a revamping of fiscal reforms and budget management to reduce the primary deficit of the government. So it results in dependency on private capital formation to tackle primary development needs.

The survery indicates the direction in which the government is moving. It shows that the government is not troubled by demonetisation, mounting NPAs and poor employment growth. It still has faith in those who are able to spend, pay taxes and engage in digital transactions!

Also read: Is India prepared for demonetisation 2.0?